Over the last four weeks, we have examined different types of loans and how they are performing at our nation's banks, particularly since all levels of past due loans have been on the rise.
While we did discover some weakness in residential real estate and also in other consumer loans, the real culprit appears to be commercial loans - more specifically: Commercial Real Estate (CRE) and Commercial and Industrial (C&I) loans.
Forty percent of the 52 banks we have listed on page 5 of this week's Jumbo Rate News (that are struggling with commercial loans) are located in three states: Oklahoma, Illinois and California.
Problems Persist in Commercial Loans
When we began this series on problem loans (JRN 42:04), we reported that all categories of problem loans (short-term past due, 90 days or more delinquent, restructured, and repossessed) had all ticked up over the year, hitting America’s Heartland the hardest.
We then set out to look at which types of loans, if any, were leading the charge. Beginning with mortgage loans (JRN 42:05), we discovered a minority of banks were having issues with residential real estate loan quality, but a small minority.
Next we looked at the various forms of non-housing related consumer debt (JRN 42:06). Problem loans in this subset were a little higher than what we found in residential real estate, but not enough to account for our initial findings (JRN 42:04). That leaves one final category to look at: commercial loans. Bingo!
Commercial loans account for at least 44.5% of total loans at each of the 52 banks listed on page 5. These commercial loans can be in the form of C&I (Commercial & Industrial loans), CRE (Commercial Real Estate) or Multi Family (5 or more) residential. Additionally, each of the banks is rated 3½-Stars or below, and, at least one of the following statements is true:
- a) delinquent loans are 3% or greater than total loans; and/or
- b) delinquent commercial loans are 3% or greater than total commercial loans.
Note that 3% delinquency rate is much higher than the 1.25% we used for residential real estate and even the 1.6% we used to determine our consumer delinquency list last week. (Either of those lower cut-offs, would have produced a two page list.)
The 3% cut-off gives us Oklahoma with the most (8 banks or 4.5% of all banks headquartered in OK). That is followed by Illinois with 7 (or 2%) and then California with 6 (which represents 4.9% of California banks). Sadly, things will likely get worse for California before they get better.
Let’s take a look at a couple of California banks to start with, like 3½-Star California Business Bank, Irvine, CA (58037). California Business Bank is proud to be both a minority-owned bank and a SBA (U.S. Small Business Administration) lender. As its name states, California Business Bank (CBB) caters to businesses. Its loan breakdown is 64% CRE; 33% C&I and 3% “other”.
If CBB were human, it would be a Gen Z, turning 20 this November. Born and raised as “digital natives”, Gen Z never knew a time without home computers or the internet. They value entrepreneurship, flexibility and practicality, which could explain the success CBB has had in attracting new business. From a virtual vault for deposits to loan officers that go out to the business, CBB has had no problem making loans. Keeping them up-to-date has proven more difficult. CBB does have high capital ratios… just in case.
Unlike CBB, 3-Star California Pacific Bank, San Francisco, CA (23242) is no stranger to this list. Where CBB saw its nonperforming loans jump for the first time with third quarter 2024 data, California Pacific Bank has been struggling with loan quality for years.
Aside from that, these two banks have many commonalities: both are small, community banks heavily invested in CRE and C&I loans and both have large capital cushions.
Conversely, the $17.5 billion asset JRN listee 3½-Star Beal Bank USA, Las Vegas, NV (57833) (the only Nevada bank on this week’s list), is not a community bank and is much larger than the first two. Its loan composition is very similar, though: 65% C&I; 30% CRE; and 5% “Other”. Delinquent loans, as a percent of both assets and loans, have been growing steadily over the past year and are much higher than its peers. Beal Bank USA, like the previous two, has a very large capital cushion; its leverage capital ratio is 19.84%.
On to Oklahoma: We have reported on 2-Star BancCentral N.A., Alva, OK (4033) before (JRN 41:39). We are pleased to report some improvement (this time). At June 30, 2023, BancCentral’s leverage CR was 9.59%. Over the next 12 months, it dropped to 8.64%. Then came the turnaround.
By September 30, 2024 BancCentral’s assets were down considerably (over 20%), which resulted in an increased leverage CR back up over 9% (9.12% to be exact). More impressive than that, was the transformation in its delinquency rates. Last June 30th, nonperforming assets represented over 11% of BancCentral’s total assets. That resulted in a Bauer’s Adjusted CR of (-2.7%) and a Texas Ratio of 136.09%. Both were quite disturbing.
In one quarter, those nonperformers were cut by 60%! That brought BancCentral’s Bauer’s Adjusted CR to 4.77% and its Texas Ratio to 67.86%. Those may not be stellar, but those ratios represent a huge improvement. A sneak peak at year-end data leads us to believe that the improvement is continuing.
Lastly, 3-Star Flagstar Bank, Hicksville, NY (32541), which you may remember is the result of the 2022 combination of the former Flagstar Bank, MI and New York Community Bank, NY. This new Flagstar Bank has been making great strides in returning itself to profitability after acquiring Signature Bank in March 2023. Its problem loans are a harder nut to crack. Over 60% of Flagstar bank’s loans are CRE and about 5% of those are in nonaccrual status. Not much of a capital cushion at this one with a leverage CR of 7.64% and Bauer’s Adjusted CR of 5.48%.
